When you analyze Groupon, you wonder what magic they have that their competitors don't have. But, upon a closer look, you realize that the magic is really a first mover advantage. They clearly have an amazing team and are innovative, but the barrier to entry is low and their competitors do regularly have deals that are just as good or better than Groupon's. Here's the real reason Groupon has scaled and others haven't:

Get all the PR. Try getting a journalist to write about you when you're the 47th daily deal site to launch. Groupon deserves the PR, clearly; but, it does prevent the other sites from getting those free users

Bought users cheaply. Being first, allowed Groupon to be the first company to buy Facebook and display ads with the message "50% to 90% Off Your City's Best Stuff". No one had seen that message before and people clicked and signed up. Groupon started advertising everywhere, buying users cheaply. By the time their competitors showed up, people had already seen the message, didn't want to sign-up for another service, conversion rates dropped, per user acquisition costs went up. Now, competitors can't buy users the way Groupon did, preventing them from scaling.

Word of mouth impact is based on scale. Lastly, word of mouth is unfortunately based on how many mouths there are to talk about your company. Groupon and its competitors may have the same percentage of their userbase recommending them, but that means a lot more new users for Groupon than their competitors.

So, if there really isn't any magic to Groupon but their competitors can't scale, then who cares. Groupon has won.

But what if they did have competitors with scale?

Groupon's Real Competition: Existing Media Companies

Many analysts are looking at LivingSocial and the other 200 daily deal startups in the space as the competition to Groupon. Actually, the real threat to Groupon is coming laterally, from established players (newspapers, magazines, vertical sites, TV shows, etc.) who already have audiences in the millions, established brands and in-house sales staff.

As for Groupon's couponing technology, there really isn't any. The technology behind Groupon is NOT like the technology for search and it's not like the technology for hosting billions of minutes of video. It's a commodity product as evidenced by the fact that 200+ daily deal startups have quickly launched in the last 18 months. In other words, technology, which often trips up established players trying to enter new markets, is not a challenge here.

Travelzoo is Killing It

Don't believe they can do it? Have you heard of Travelzoo? Yeah, that old company that sends travel deals once a week. Well, it turns out they have 20 million people on their email list and a brand that their users trust to recommend deals.

So, a few months ago, they decided to try selling some local deals. Not exactly in their wheelhouse but it was easy to set up.

Their first deal was 54% off a spa package in New York selling for $125- pretty boring and pricey. How did they do? They killed it. They sold 2,033 deals. Not only did their first deal out-perform Groupon's deal in New York that day, it out-performed every deal Groupon had ever run in New York.

Think it was a fluke, take a look at some of their more recent deals. Wall Street has noticed. Their stock is now up 120% since they started doing daily deals a few months ago.

But maybe these publishers are the better companies. The older companies won't figure it out. That might be true but there's a whole slate of white-label daily deal companies that will make sure they take advantage of the opportunity.

Lastly, the brands of these media companies, while not having deal authority, do have product and service authority. They've been telling their audience how to spend their money for years. For example, you are much more likely to trust a golf magazine's recommendation of a specific golf course outing than Groupon's recommendation. Plus a golf course would rather be recommended by a golf magazine than Groupon.

These large, old media companies with millions of users and strong brands will create real competition for Groupon.

Real Competition Benefits Aggregators

With a bunch of successful, large daily deal services, a service like Yipit (tiny disclosure: I co-founded Yipit) that gives users one place to browse, purchase and manage all of these deals from all of these sources is inevitable. As more of these larger services launch, users will realize there are a so many of them and will seek one place that's a one-stop-shop. If that happens, Groupon will suffer from just being one of many deals a user is browsing.

In all honesty, we always thought Google would actually want to be this place and have been expecting competition from them. So, we are actually kind of rooting for Groupon to accept their offer.

Is Groupon the AOL of the daily deals space?

Like Groupon, AOL aggressively acquired users in the 90′s to offer them dial-up internet as an ISP. Other ISP's launched to offer the same thing. Groupon has been acquiring users to provide them daily deals. Like internet access, a daily deal is a commodity product.

AOL then tried to create a walled garden for their users much like Groupon is trying to create a walled garden with Groupon Stores.

As we all know, it turned out that there were existing companies that already had strong relationships with AOL's new customers, cable and phone companies.

Cable and phone companies then rolled out their own internet access product and severely damaged AOL's business. As I explained above, there are many publishers today that also have relationships with users (like the telecom companies did) and have been telling those users how to spend their money for years. They will also release their own daily deals product introducing significant competition for Groupon.

And, of course, AOL's walled garden didn't survive just like Groupon will fail to erect their own walled garden with Groupon Stores. Just like users left AOL's walled garden to see all of the content the internet had to offer, users will leave Groupon's walled garden to the services that are exposing all of the deals, services like Yipit.

And, lastly, in case Groupon is about to order a hit on us, we believe Groupon is an amazing and successful company that is definitely worth the $6 billion price Google is offering despite just being just a 2-year old company. We're just making the point that maybe they realize, on a risk-adjusted basis, they might not be worth much more than that.